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ED Preventing currency turmoil

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Government should not ignore rising short-term foreign debt

Korea's short-term foreign debt ratio to its foreign reserves rose in the second quarter to its highest level in a decade. According to the Bank of Korea, the country's external liabilities hit an all-time high of $662 billion on June 30, up $7.9 billion from three months earlier. Its short-term debt that matures in a year grew faster by $8.9 billion to $183.8 billion. As a result, the ratio of short-term liability to foreign reserves climbed to 41.9 percent, its highest since the second quarter of 2012, when the ratio stood at 45.6 percent.

Still, a financial official said on Friday, “Our external debt remains at a stable level, considering the past trend, repayment capability and other details.” Of course, the short-term debt ratio is far lower than the 78.4 percent recorded in the third quarter of 2008. However, as many older Koreans remember, a steep increase in short-term foreign debt could result in abrupt capital outflows in the event of an economic or financial crisis.

The Korean economy is now entering a dark tunnel. Its cumulative trade deficit totaled $22.93 billion as of Aug. 10, exceeding the previous high of $20.6 billion in 1996. In addition, the country's currency fell to 1,328 won per U.S. dollar last Friday, the lowest in 13 years and four months. The U.S. interest rate hikes, the rising foreign exchange demand of Korean companies due to commodity price increases and the boom in overseas securities investment are speeding up foreign exchange outflows.

Korea has never been free from global currency turmoil. Unexpected factors can increase the country's foreign debt sharply at any time. The government should strengthen its management of the soundness of external liabilities to prevent capital outflows. Equally urgent is enhancing its fiscal health to prevent the fall in the country's international credit standing. It's a relief in this regard that the government is tightening its financial belt, because the country's efforts to reduce the trade deficit and manage short-term foreign debt rely heavily on external factors often out of its control.